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Filing for bankruptcy can help you navigate situations where you are drowning in debt. The first step of that process is determining which type of bankruptcy you should be filing for, a process that typically requires determining your eligibility.
The Illinois Means Test is meant to assess your ability to at least partially repay creditors in the course of a bankruptcy filing. The short version is, if you have means to pay back some of your outstanding debt, you will likely qualify for Chapter 13 bankruptcy. If you do not have means to repay, you will likely be eligible for Chapter 7 bankruptcy.
These two types of consumer bankruptcy carry vastly different implications for your estate, so it is critical you understand for which you are likely to qualify. The state’s Means Test makes this determination. Below, we explain how the Means Test works, when you should use it, and what the results could mean for you.
There are two types of consumer-oriented bankruptcies, each with differing processes and means of resolving outstanding debts. In both types of filings, you will in some way “repay” your creditors, but the means in which you do so will be determined by your current resources.
Chapter 7 bankruptcy uses a liquidation process, selling nonexempt assets and giving the proceeds to creditors. Chapter 13 bankruptcy instead reorganizes your debt into a single, monthly installment you must pay for a period of 3 to 5 years.
Many people instinctively want to file for Chapter 7 bankruptcy, if possible, since you will not have to make additional direct payments, and the process generally ends faster. Remember, though, that liquidation is bound to impact your estate on some level. State or federal exemptions will help you protect some of your property, but you should never assume you will get through liquidation unscathed.
The reality is you do not really get to choose whether to file Chapter 7 bankruptcy or Chapter 13 bankruptcy: The Illinois Means Test decides for you. When you are considering filing for bankruptcy, you will need to evaluate your current financial scenario under the Means Test to learn under which type of bankruptcy you will be expected to file. Attempting to file for a type of bankruptcy you are not eligible for will almost certainly result in a rejection, resulting in wasted time and resources.
The Means Test was in part introduced to help regulate the amount of people filing for Chapter 7 bankruptcy. However, even if you are confident you only qualify for Chapter 13 bankruptcy, you will still likely need to complete the Means Test to determine the scope of your repayment plan.
A helpful way to think about the Means Test is it is attempting to determine if you qualify for Chapter 7 bankruptcy. If you do not meet the Means Test’s thresholds for Chapter 7 bankruptcy, you will most likely be able to file for Chapter 13 bankruptcy instead.
The first step of completing the Illinois Means Test is to calculate your average income over the past 6 months. You must then compare your average income to the average median income for your household size in the state. These medians are updated regularly. If your average income is less than the average median income for your household size, you automatically qualify for Chapter 7 bankruptcy. The rest of the Means Test becomes moot.
As of May 1, 2020, the average median incomes for Illinois are:
As you can see, your household size can play a large role in determining whether you qualify for Chapter 7 bankruptcy. How, then, is household size evaluated? Unfortunately, there is no clear-cut answer, and bankruptcy courts often differ on how they interpret this element of the Means Test.
You might be tempted to claim you have a 6-person household, for example, if 6 people literally live under your roof. A bankruptcy court might disagree on this point, particularly if any residents do not make meaningful financial contributions.
Some courts will insist the only people who count are those that the filer claims as dependents on their income tax return. This can get dicey or even feel unfair, as you might have one or more persons who genuinely live in and contribute to your home but are not eligible to be claimed as a dependent.
With this in mind, other courts will engage in the more generous “economic unit” criteria for assessing household size. Economic units include any dependents listed on a tax return plus anyone else who contributes to the household’s finances. This can include the debtor’s spouse or adult children who still live with the debtor but can no longer be claimed as dependents.
Earlier, we mentioned that you will need to tabulate your average income for the past 6 months. The 6-month distinction is important, as it could be the determining factor of whether you “pass” this portion of the Means Test.
Consider, for example, a scenario where you lost your job – your primary means of income – 4 months ago. The loss of this income has put you significantly behind on mounting debt payments. The job you lost was extremely well-paying, meaning if you tried to file for bankruptcy while you still had it, you almost certainly would not qualify for Chapter 7 bankruptcy. However, because you are only evaluating the past 6 months, your average income will be dramatically lower than what you have historically earned. The takeaway is that a major change in financial circumstances, like losing an income stream, could potentially make you eligible for Chapter 7 bankruptcy under the Means Test. In some cases, waiting a few additional months after a job or income loss could lead to your becoming eligible if you previously were not.
If your average income over the past 6 months is equal to or greater than the average median income for your household size, you will not immediately qualify for Chapter 7 bankruptcy. You may still be able to file Chapter 7, but you will need to complete the second stage of the Means Test to find out. This involves figuring out your monthly average disposable income.
You will have already calculated your current income level, so the next step is to determine your expenses. In the context of the Means Test, expenses refer to unavoidable costs necessary to your reasonably living your life. They do not include extravagances, like second homes, fancy dinners, or pricey gifts.
Once you have assessed your level of expenses, you will subtract the total from the monthly income. The resulting number is your disposable income, which will play a major factor into whether you qualify for Chapter 7 bankruptcy and, if not, what your Chapter 13 bankruptcy might look like.
Expenses that can be subtracted from your income include:
Obtaining an accurate evaluation of disposable income will be critical for your bankruptcy filing, regardless of whether you file for Chapter 7 or Chapter 13. The rules on limitations on what expenses can be deducted are often confusing: A qualified bankruptcy attorney can help evaluate your finances and determine an accurate disposable income.
Once you have your disposable income calculated, you can see if you may still be able to file for Chapter 7 bankruptcy. You will need the Illinois Chapter 7 Means Test form, which lists a maximum amount for disposable income. You will need to multiply your number by 60 (per the instructions on the form); if the resulting amount exceeds the maximum allowance, you do not qualify for Chapter 7 bankruptcy.
Even if your resulting number is below the maximum threshold, you should also check if your disposable income (multiplied by 60) is equal to or greater than 25% of your total unsecured debt. Unsecured debts can be discharged after completing either type of bankruptcy. Remember, the goal of the Means Test is to see if you have “means” to repay some of the debts. If your disposable income can indeed cover at least 25% of the obligations you would eventually discharge, you will be expected to pay up through a Chapter 13 bankruptcy.
If you do not end up qualifying for Chapter 7 bankruptcy through the Means Test, do not worry: Chapter 13 bankruptcy is also extremely helpful in managing debt, and you will not need to go through liquidation. The Means Test will still be important if you pursue Chapter 13 bankruptcy, as your disposable income will in most situations determine the amount you will be expected to pay for 3 to 5 years.
The Illinois Means Test can seem relatively straightforward until you get into the nitty gritty of what counts as income, what constitutes household size, and what expenses you are allowed to deduct. Our bankruptcy attorneys at Bach Law Offices, Inc. can help you navigate each step of the Means Test and establish which type of bankruptcy you are eligible for. We have over 40 years of combined legal experience and are prepared to advise you as you consider bankruptcy, no matter the size or complexity of your financial situation.